Invoices and bills are payable within a certain number of days after the invoice date. This is called the credit period, and the length of time between the invoice date and payment date is called the days payable outstanding (DPO). It is an important metric used in accounts receivable management, as it indicates how long a company takes to pay its invoices from trade creditors and is used as an efficiency metric.
In this article, we will be talking about what days payable outstanding is, how to calculate it, and what factors can impact this number. So let’s get started!
What is Days Payable Outstanding
Days payable outstanding (DPO) is a metric used to measure how quickly a company pays its invoices from trade creditors. It is important to manage this number effectively, as a high DPO can indicate inefficiencies in accounts receivable management and lead to cash flow problems.
It might even be an indication that the company is taking on too much debt. A high DPO can also make it difficult to obtain credit from suppliers in the future. So it’s important to keep the DPO in check and understand what factors can impact this number.
Importance of Days Payable Outstanding
As we mentioned earlier, days payable outstanding is an important metric used in accounts receivable management. It can be used to measure the efficiency of a company’s accounts receivable process and identify any potential problems that might be causing payment delays.
It can also be used to negotiate better payment terms with suppliers, as a high DPO can make it difficult to obtain credit in the future.
In addition, DPO indicates the amount of time that a company’s cash is tied up in accounts receivable. So, if a company has a high DPO, it means that its cash flow may be affected. You can use this information to make decisions about how to allocate your company’s resources.
How to Calculate Days Payable Outstanding
So now that we know, what days payable outstanding is, let’s look at how to calculate it. The formula for DPO is quite simple:
DPO = (Accounts payable x number of days) / COGS
So this is the formula of days payable outstanding, but what do all these terms mean, let’s break it down:
- Accounts payable: This is the amount of money that the company owes to its trade creditors. It means all the invoices and bills that are payable within a certain number of days after the invoice date.
- Number of days: This is the number of days between the invoice date and payment date. It is the credit period that we talked about earlier.
- COGS: Cost of goods sold, this is the total cost of all the goods and services that your company has sold during a certain period.
Conclusion
We hope this article has helped you to understand what days payable outstanding is and how to calculate it. Remember, it is an important metric used in accounts receivable management, as it can help you to identify any potential problems that might be causing payment delays.
Further questions
What's your question? Ask it in the discussion forum
Have an answer to the questions below? Post it here or in the forum
Read excerpts from columns that appeared in April, May and June 2024 in FP Comment. This in the second instalment in a series
For many companies in the EV space, the biggest question is what it will take to reverse the declining momentum and regain solid footing
